RESOLUTE ENERGY; REN-NYSE
In early July, Resolute was a zombie stock left for dead by the Market, burdened by $520 million in expensive debt. Then two (I think) unrelated things happened in quick succession.
- On July 8, they issued better than expected drill results, and said they would beat Q2 exit guidance by some 4000 boed, or 36%.
- On July 13, Diamondback Energy (FANG-NASD) spent $560 million to buy a land package in the same county in the Delaware Basin (western Permian, very close to New Mexico border) as where Resolute is—with roughly the same number of development wells. This transaction gives the Market a DIRECT comparable for Resolute—and as my math shows, that would value Resolute at just over $27/share. It closed Friday July 15 at $7.71. That $27 number is about 500% higher than what I paid at $5.60 for my initial purchase.
In one sense, you don’t need to read any farther. Someone is going to buy Resolute at a much higher price than what it’s trading at now—it is incredibly accretive for all the large independent Delaware Basin producers.
Even with $487.5 million in debt. That’s because there’s only 15.5 million shares out. Debt is one form of leverage. A very low share count is another. I LOVE low share float companies!
All the backup is below. My position size isn’t large, but it doesn’t have to be if this works out.
|Basic Shares Outstanding:||15.4 million|
|Market Cap:||$118 million|
|Net Debt:||$528 million|
|Enterprise Value (EV):||$646 million|
|Current Production:||15,000 boe/d (82% oil)|
|2017 EBITDA estimate:||$87.9 million|
- Valuation against relevant comparables is very attractive
- The Delaware Basin assets can generate positive IRRs under $50 per barrel
- An attractive and accretive acquisition target for nearby competitors
- Big Growth ahead should be a major catalyst
- Underlying, low-decline conventional production from non Permian asset
- Lots of liquidity
- This management team did take the company to the brink
- Too much debt and that debt is expensive
- Company getting acquired could cut a very long and enjoyable stock run short
Cash poor isn’t doing it justice. It is more like asset rich and overloaded with debt.
A month ago I wouldn’t have touched this company with a ten-foot pole because of its balance sheet. But as I outlined in the intro, the value of its Delaware Basin assets have increased significantly in 2016.
Since the oil crash in 2014 Resolute has been selling off assets to try and stay alive.
In 2015 the company sold three assets to bring down debt:
- March 2015 sold non-core Midland Basin assets for $42 million
- September 2015 sold its Powder River Basin assets for $55 million
- November 2015 sold the rest of its Midland Basin assets for $177 million
That was the right move but it must have been painful for longer term Resolute shareholders to watch. Resolute had loaded up on debt just a couple of years ago in 2012 and 2013 to acquire these assets.
In 2012 the company added $400 million in long term debt that was used for a series of acquisitions which included Permian assets and further consolidation of the company’s Aneth field. In 2013 another $170 million of long term debt was loaded onto the balance sheet mainly for additional Permian acquisitions.
With $90 per barrel oil the debt load of the company was manageable. With sustained sub $50 per barrel oil that debt load became crippling.
I’m still amazed at how many management teams in this industry built their balance sheet from 2010 to 2014 on the assumption that $90 plus oil was here forever. I mean it had only a couple of years since the last crash….
Doesn’t anyone plan for the unexpected?
The assets sales kept the lights on at Resolute and bought the company time. And with the operations update Resolute released on July 8, 2016 the market found out that management had put that time to good use in the Permian Basin.
The main formation that Resolute is chasing in Reeves County is the Wolfcamp both the A and B versions of it.
Prior to the July 8 operations release the last time that Resolute had released details on its Reeves county Permian production was on May 9, 2016. The company was then able to give IP30s (IP=Initial Production; IP30=first 30 days of production average) on two recent 7,500 foot lateral wells—which came in at
1,552 boe/day and 1,475 boe/day.
Those results were more than acceptable.
The July 8 release however revealed that Resolute’s most recent Permian wells blew the prior (good) wells completely out of the water.
The operations update revealed that Resolute has now moved to 9,000 foot laterals (as planned) on its Appaloosa property and that these wells were generating much higher production rates than expected. The 30 day production
rates on the most recent of those wells have reached 3,000 boe/day.
With these new data points on its wells and with results from competitors with offsetting acreage, Resolute has upped its Wolfcamp A type curves.
The 7,500 foot laterals are now expected to recovery 56% more oil and gas and the 10,000 foot laterals 51% more than previously believed. Not only are the longer laterals making a difference, but the well and completion designs have led to big increases on the 7,000 foot wells too.
Lower capex and increased flows puts the PV10 value of $10 million per well at these low oil prices. Wells costs on the longer laterals are $9.4 million and the shorter ones they’re targeting $8.2 million. Ideally I want to see a PV10 that’s 130-150% of the well cost, but that’s…ok given the oil prices we are currently talking
Any horizontal wells that generate decent returns at these low oil and gas prices is a good thing.
Resolute has 22,420 gross / 12,940 net acres under lease in Reeves County where it believes it has identified 255 gross Wolfcamp A and Wolfcamp B locations to drill. That gives them 147 net locations.
The wells are only 55-60% oil (though natgas is starting to be worth something!). Resolute’s average working interest is about 57%. These wells coming in 50% ahead of expectations meant that Resolute exited Q2 over 15,000 boepd—the Street was expecting 11,000 boepd. Their capex program for the year—nine wells—will be done in August.
The company is looking at 160 net drilling locations in the Wolfcamp A and B. There is potential to increase that with tighter spacing or if some of the other formations becoming targets for drilling (there are up to 6 different formations on the property).
The Aneth Field
You wouldn’t know it given all the attention the recent Delaware Basin wells have received, but Resolute’s largest producing asset has actually been in Utah.
It is a classic “giant” oil field with original estimates of oil in place to be 1.5 billion barrels. Original development took place during the 1960s and secondary recovery methods were applied very quickly.
The field has been under waterflood since 1961 and a major CO2 flood started on the McElmo Creek Unit in 1985.
There are three different units that make up the Aneth field: Aneth, McElmo Creek and Ratherford. Because each of these three units were for a long time controlled by different companies it was not possible to roll out a coordinated secondary recovery scheme across the entire field.
Resolute saw this as an opportunity and acquired each of these units starting back in 2004. The plan was to roll out a CO2 scheme across the entire field.
The company did just that starting in 2007. As you would expect from a secondary recovery project production is very stable. The past five quarters have seen production at just over 6,000 boe/day (99% oil).
The Co2 is injected into the field to keep pressure up and force oil up through the producing wells. Production can be kept flat with minimal capital expenditures. It’s a cash cow like few producers get to enjoy.
The obvious plan would be to take the free cash flow from Aneth and pump it into drilling these terrific Permian wells. Another option would be to sell the Aneth property and focus fully on the Permian (although this company has sold enough assets into a buyer’s market).
Aneth has 25 million barrels of proved reserves 95% of which are oil.
It certainly looks like Resolute is going to pull off something that very few of the oil patch zombies will manage to do.
Get out from under a suffocating debt-load.
I said looks like, not that it was a done deal. There is still much work to be done.
Along with the announcement of the most recent well results Resolute announced that it had sold some midstream assets and would be immediately receiving $32.5 million in cash.
I would expect that cash to be used to repurchase some of Resolute’s outstanding notes. Right now the company has:
- $128 million of LIBOR + 10% Notes due November 2019
- $400 million of 8.5% Senior Notes due 2020
The 2019 notes have already been reduced from $200 million to $128 million so they would be where that cash would likely go.
The company’s $100 million revolving credit facility is completely undrawn so they are in good shape liquidity wise.
Have a look at the top line in the table below which details how Resolute was able to work down that Bank revolver since the price of oil crashed.
So liquidity is good, the problem is with the total amount of debt.
The rough EBITDA average for 2016 among the brokerage reports I read was $85 million, and with debt now just under $490 million (post the midstream deal) that’s debt to cash flow of 5.7:1. That’s definitely zombie territory.
The Market will have to wait and see how the company brings it back in line but I think that they have an opportunity to do it.
Rising oil prices and increasing production over time could certainly help, so could further asset sales. The company’s Permian acreage in the Delaware Basin is now extremely valuable and that is going to give the company options—including issuing shares now that the stock price has increased.
The hedges that Resolute has in place will help support cash flow through the rest of this year. They have most of their oil production (82%) hedged at $82 per barrel.
VALUATION (this is the juicy part!)
We have a very fresh comparable asset transaction from which we can put a pretty precise value on Resolute’s New Delaware acreage.
Diamondback (FANG:NASD)–the premier small intermediate producer in the Permian–just did their first acquisition in the Delaware basin where Resolute is. It was a large $560 million deal and tells us EXACTLY what Resolute is worth.
The numbers are I’m about to present are going to be hard to believe. They are also hard to argue with though given the proximity of these assets to Resolute’s and the fact that the deal just occurred.
Here are the details that Diamondback released:
- 19,180 net surface acres primarily in Reeves and Ward counties
- Approximately 1,000 boe/d of current net production based on data provided from the seller
- Net proved developed reserves, based on internal estimates as of July 2016, were approximately 2.2 MMboe
- 290 net identified potential horizontal drilling locations across four zones with additional upside potential in other zones and through downspacing
- Contiguous position supports average lateral lengths of approximately 9,500 feet